Investors and traders purchase stock to obtain ownership stakes in corporations. Most will purchase shares of public companies whose shares are sold on market exchanges. Stock market exchanges such as the New York Stock Exchange, NASDAQ and AMEX provide a marketplace for investors to buy and sell stock. Investors will usually purchase shares of at least several different companies to create a diversified portfolio that matches their tolerance for risk because stock prices can rise or fall dramatically based on financial news, market conditions and investor sentiment.
An investor can take long or short stock positions. A long position is a bet that a stock will appreciate in value. He will buy the stock to open a position and then sell to close out a position. With short selling, an investor gambles that a stock will depreciate in value. He will borrow shares from his broker and then sell them on an exchange. To close his position, he will buy the stocks back, return the borrowed stock to his broker and pocket the difference between the sale and buyback price.
An investor will use a broker to trade stocks. He can pay a brick and mortar broker to handle trades by phone or use an online brokerage to trade stocks electronically. Since brick and mortar shops have more expenses and limited hours, an investor should utilize online trading to minimize trading fees and maximize trading flexibility.
An investor or trader can turn over stock market investments in seconds or hold stocks for decades. A day trader profits from small fluctuations in the value of stocks, opening and closing multiple positions in the same day. Swing traders may take advantage of swings in the prices of stocks over a period of several days or weeks. Investors have a long-term outlook on the future of companies and will often hold positions for a year or longer.
Young investors with a healthy appetite for risk and returns can invest in growth stocks. Rapidly expanding companies with a small market capitalization have more potential for future price appreciation but can experience dramatic fluctuations in pricing. Experienced investors with a lower tolerance for risk can invest in blue chip companies that feature a large market capitalization and offer steady returns with fewer price fluctuations.
Stock market participants profit from their investments through price appreciation and dividends. Price appreciation occurs when other investors highly value stock due to increased company profits and anticipated growth. Dividends are company profits paid out to shareholders as a privilege of stock ownership. Conservative investors usually take advantage of both dividends and price appreciation to expand the size of their portfolio, while risk tolerant investors profit primarily from stock appreciation.
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